The Worst Tax Reform That Money Can Buy

November 15, 2017

Charities and foundations are lucky. Often their self-interest and the public interest seem to be in conflict. But not this month, thanks to Congressional Republican efforts to "reform" the U.S. tax system.

It's the same old class warfare that Republicans have promoted since the days of Ronald Reagan, and it must be opposed for the sake of both the nonprofit sector and the people and causes who rely and depend on the sector.

As detailed elsewhere, standard deduction provisions alone would cost charities more than $13 billion in donations each year. Changes in the estate tax, which the House proposes to eliminate and the Senate would reform by doubling the exempt amount, would also have a devastating impact. When the tax was suspended for a year in 2010, bequests dropped by over a third; full repeal would cost the Treasury $270 billion over a decade that might otherwise fund critical needs across America. Yet the Republican proposals allow the top one-fifth of one-percent, the very wealthiest 00.2 percent of Americans, to keep that money, even though most of it has never been and never would be taxed.

Why are Republicans willing to cause so much harm to charities and ordinary people? Because, as has been candidly admitted by Republican politicians themselves, their donors and wealthy CEOs (often one and the same) expect it and have even threatened them if they fail to deliver. And, as a harbinger of worse things to come, some Republican-aligned groups are spending upwards of $40 billion to sell middle-class voters on the plan.

In a further move to serve their own narrow interests, House Republicans are angling to repeal the Johnson Amendment and allow 501(c)(3) organizations to engage in partisan political activity. If they succeed and donors start to use tax-exempt charities to fuel their own partisan agendas, the Treasury stands to lose more than $2 billion in tax receipts, and nonprofit organizations of all persuasions are likely to become embroiled in terribly divisive partisan debates over policy. They would also be much more susceptible to coercion by their donors — and by government contract and grant officials — to adopt partisan positions, or face the consequences.

Other provisions hidden in the House or Senate bills — and, remember, provisions in either bill can become law through the work of the final conference committee — do harm to certain charities and those they serve. One proposal would tax the endowment earnings of large universities. As it stands currently, this would cost those institutions a cool $3 billion a year, money that might otherwise be used for student financial aid. It would also open the door to such policies being extended to other charitable entities and funding streams.

Related proposals would hurt university students more broadly and directly. The deduction for student loan interest would disappear, with potentially devastating consequences for roughly twelve million Americans. Student tuition waivers also would be taxed. In total, another $65 billion would be taken from students to finance the Republicans' money grab — even as the same politicians push regressive policies that will exacerbate inequality and make it harder for the working class to realize the American dream.

Under another Republican "reform," universities, hospitals and other charities would no longer be able to finance new facilities and capital improvements through tax-free bonds issued by state and local governments, raising the cost of education and health care by close to $40 billion. School teachers' deduction for the cost of the supplies they buy (only covering the initial $250 they spend) would disappear. And the close to nine million Americans who claim a medical expense deduction (many of them served by nonprofits) are more likely to become even sicker as they watch the transfer of more than $180 billion in tax benefits to the wealthy and large corporations. Seniors would be hurt the most.

There's more. For the first time ever, charities would find certain of their practices subject to fiscal disincentives. Compensation of over $1 million paid to any staffer would be subject to an excise tax.

Now, while some might favor discouraging excessive compensation packages in the charitable sector (I among them), others (I among them) argue that: first, without competitive salaries, large nonprofit hospital systems and similar entities will be unable to today attract the qualified people they need to run those operations; second, that government ought not to impose such disincentives on nonprofits without commensurate action on corporations that have driven up executive compensation to egregious multiples of the average worker’s wage; and third, that it is a terrible precedent for politicians to decide which charitable practices they like or don't like and to use tax policy to enforce their preferences.

Other policy provisions will dramatically impact ordinary Americans. While capping the deduction for mortgage interest is likely to hurt those with more expensive homes, House Republicans don't seem to mind the fact that tax-payers in cities with the highest cost of living — places that, not coincidentally, tend to vote Democratic — will be penalized the most. So, too, the Senate's plan to eliminate the deduction for state and local taxes — a provision that would disproportionately affect those living in "blue" localities.

As "ambitious" as the House, Senate, and White House "reform" packages may be, they clearly work to the detriment of charities and the public. Even as Republicans try to sell their efforts as a boon for the middle class, Senate Majority Leader Mitch McConnell has had to admit that the upshot for 25 percent of those in such income brackets is a higher tax bill. Indeed, it is wealthy people like Donald Trump who already pay far less than their fair share of taxes who will benefit the most.

No matter which of these specific proposals survive initial votes in the House and Senate, no matter which of the president's regressive ideas are adopted, and no matter what kind of bill emerges from the conference committee for a final vote, the "reforms" gleefully touted by Republicans will be ruinous for the nation. Charities and organized philanthropy need to stand up and speak out now — for themselves and for the public and the planet — before it's too late.

Mark Rosenman is a professor emeritus at the Union Institute & University. To read more of Rosenman's commentary, click here.